Buy DLF; target of Rs 225: Motilal Oswal

Motilal Oswal is bullish on DLF and has recommended buy rating on the stock with a target of Rs 225 in its August 30, 2012 research report.

“DLF, A challenging macro environment (cost inflation, approval hurdles, etc), delays in planned launches, and weaker annual sales (witnessed recovery in 4QFY12) led to subdued operating surplus in FY12. We estimate that DLF generated RS37.8b (v/s RS36.1b in FY11) of cash surplus (before interest and capex) from (a) core operations (down RS3.5b YoY) and (b) asset sales (up RS5b YoY). However, higher interest outgo (RS30.1b, up 4.2b YoY) and incremental land purchase (RS10b) resulted in net debt increasing by RS10b. Net working capital increased by RS15b, largely on account of land acquisitions, higher tax payment (RS11.5b, up 4b YoY and ~3.1x P&L tax entry), while the movement in receivables was broadly in line with revenue booking and pace of monetization.”

“DLF's balance sheet is much cleaner (barring some contingencies) post the consolidation of DAL and preference share buyouts. However, it is yet to gain strength owing to delay in large ticket divestments and weaker operating cash flow (FY12 divestments were largely utilized to bridge operating deficits). Visibility on big ticket asset sales holds the key to major debt reduction in FY13 (maturity of RS48.4b of long-term debt).”

“Management is positive on the long-term potential of the real estate sector, it expects the near-term business/economic environment to remain challenging due to: (1) inflationary pressure, (2) regulatory headwinds, and (3) tight funding and elevated interest rates. The company's priorities would be: (1) focus on profitability and executions, (2) improving operating cash flow through higher asset turn, (3) judicious spending on new capex, and (4) debt reduction."

"We maintain our view on DLF as a high delta play on improving operating leverage (quality launches, higher sales, faster execution and uptick in cash conversion) and financial leverage (success in divestment-led deleveraging and interest rate down-cycle) over FY13-14. Positive surprises on divestments and debt reduction remain the immediate catalysts. The stock trades at 22.3x FY14E EPS and 1.3x FY14E BV, and at a 30% discount to NAV. Buy with a one-year TP of RS255,” says Motilal Oswal research report.

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